Cluster policy 101: Don’t force it

June 22, 2016

Can you create something out of nothing? In the world of cluster policy, the answer is no.

There are many clusters in the world that you may have heard of - from the Champagne region in France, to Silicon Valley in California, to Ontario’s Technology Triangle in Waterloo. These regions represent geographically proximate and interconnected groups of companies, suppliers, services providers, and associated institutions.

Governments want clusters in their jurisdictions because these companies generate innovation, jobs, and investment potential. These outcomes are essential for growing a region’s gross domestic product and improving overall productivity. For each cluster environment you have heard of, there will be a handful of those you haven’t. This is because not all efforts made by governments will yield successful cluster development results.

Here are five rules the government should follow when considering cluster policy:

1. Don’t invest without a strategy

Spreading public dollars across all infrastructure improvement projects does relatively little to boost a specific cluster. If governments wish to build on the strength of an existing cluster, they should target investment toward what is called specialized infrastructure. These type of strategic investments, those that build on local expertise, benefit the existing cluster and can decrease the barriers to entry for new firms.

2. Don’t hand out subsidies

Governments have – and still – use this approach to generate economic growth. This strategy assumes, however, that subsidies and tax cuts encourage companies to relocate to a particular region. In Working Paper 21, Open for business, the Institute analyzed the factors that attract businesses to an area and found that subsidies are often ineffective policy with high costs and low returns. Instead, governments need to focus on strengthening the elements of the cluster environment that will truly drive businesses to the region: educating and training skilled workers and managers, and encouraging and convening cluster initiatives.

3. Don’t play copycat

Many governments have attempted to recreate Silicon Valley.Silicon River in St. Louis and Silicon Glen in Scotland are examples of such attempts. Copying a successful cluster will yield less than ideal returns because the first mover advantage has already been realized. In other words, regions will not see the same positive gains as Silicon Valley because the original cluster has already solidified its place in the market and claimed valuable resources. Instead, firms need to create products that set them apart from their counterparts in other regions.[1] To gain a competitive advantage, companies must leverage elements of the existing business environment in the region to form a cluster that is specific to the region’s offerings and strengths.

4. Don’t force it

Regional governments have built technology centres, industrial zones, and business parks in hopes of spurring cluster growth. Cyberjava, just outside of Kuala Lumpur in Malaysia was an attempt to create the Silicon Valley of the east, but has failed to live up to its lofty goals. Instead of housing startups or innovation hubs, the 35,000 employees provide call centre support for global technology firms. Other regions doing the same thing have rarely seen success. Infrastructure – and productivity-enhancing ones at that – should follow after a cluster has developed instead of being forced to occur where government decides. This is why mapping the existence of clusters is fundamental to this policy work – it helps government and other investors identify where a cluster is growing and how best to support it.

It is refreshing to see that the federal and provincial governments' recent initiatives on clusters are in support of firm-led development. Although government is integral to laying the groundwork for and enhancing existing business environments, it cannot be the creator of clusters. Unfortunately the phrase ‘if you build it, they will come’ does not apply to cluster creation.